Neither the Dow Jones Industrial Average nor the S&P 500 is in a bear market. However, a prominent member of the two indexes is. Shares of Amazon (NASDAQ: AMZN) remain down more than 20% below the previous high set in February, even after an attempted rebound in recent days.
Some investors may be tempted to give up on Amazon. I don’t think that’s a great move, though. History suggests that now could be a smart time to buy Amazon stock.
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You might be surprised just how often Amazon’s share price has fallen by 20% or more from a previous high over the years. The company conducted its initial public offering in May 1997. Since then, by my count, the stock has been in a bear market 21 times. That’s a 20%-plus decline of roughly once every 16 months on average.
Sometimes, the steep sell-offs have been brief. For example, Amazon’s shares tanked in February 2020 along with most stocks as COVID-19 swept across the world. But the stock recaptured its previous high in less than two months.
Other times, though, Amazon remained in bear market territory for a long time. The stock was hit especially hard when the dot-com bubble burst in late 1999 and early 2000. It took Amazon nearly nine years to recover.
Regardless of how long Amazon’s share price stayed depressed, though, every pullback presented a great buying opportunity for long-term investors. If you invested $10,000 in Amazon on the day its shares plunged on Dec. 10, 1999 (which would have seemed to be horrible timing), and never sold, you’d have nearly $340,000 today.
On a related note, Amazon is also trading at a historically low valuation. That’s partly because of the latest sell-off. However, it’s also due to the company focusing intently on improving profitability.
Amazon’s shares currently trade below 33 times trailing 12-month earnings. The last time the stock was this cheap was during the market meltdown of 2008, in the midst of what would later be called the Great Recession.
How much money would you have now if you had invested $10,000 in Amazon stock the last time its valuation was this low? Over $760,000. There’s limited historical precedent, of course, but the past seems to indicate that buying Amazon when its price-to-earnings multiple is under 33 is a really great time to invest in the company.
For what it’s worth, Amazon’s forward price-to-earnings ratio is even lower — 27.55. This underscores that Wall Street expects the company to continue growing its earnings robustly next year.